The Hindu Business Line : Why price increase is good

Last week, I had written about how consuming memories could lead to enduring happiness. One of my friends, a watch collector, wanted to know if I could discuss a consumption pattern using Rolex that went against the basic tenet of classical economics. So, what follows is an explanation of Veblen goods. What is that?

Suppose you buy a watch for Rs 3,000. It primarily satisfies the utility value derived from a watch with basic aesthetics to boot. You certainly cannot flaunt such a watch at a Saturday night party.

Value-expressive feature

But what if a watch means more to you than just its utility value? You would then prefer to buy a watch that is eye-catching and expensive. A diamond-studded Rolex, for instance.

Behavioural psychologists argue that your desire to pay several lakhs, if not crores, to buy a diamond-studded watch is because of its value-expressive features. This is the satisfaction derived from owning the product that goes beyond the traditional utility value.

It is this value-expressive feature that drives the demand for such goods. Classical economics shows us that change in price can have distinct effect on demand; an increase in price typically pushes down demand for a product. The reason is that you and I would either cut our consumption of that good or actively look for cheaper substitutes. If coffee prices go up sharply, people may shift to consuming tea, for instance.

Consumption pattern

But such a consumption pattern does not fit goods that are bought for their value-expressive features. If price of a Rolex were to go up, demand could go up as well! Why?

The increase in price could make the product more desirable as a status symbol. That is, costlier the product, more the status-conscious people would clamour for the good. A decline in its price could, hence, make such goods less desirable.

Products that follow such price-demand relationship are called Veblen goods, named after Thornstein Veblen who first documented this phenomenon in his book The Theory of the Leisure Class.

(The author is founder of Navera Consulting.)

More Stories on : Economics | Simple Economics

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page